Match List-I with List-II
| List-I | List-II | ||
| (A) | Effective demand | (I) | National Income |
| (B) | Say's law of markets | (II) | Aggregate demand exceeds aggregate supply at full employment |
| (C) | Inflationary gap | (III) | Supply creates its own demand |
| (D) | Aggregate supply | (IV) | Aggregate demand at equilibrium level |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A)-(IV), (B)-(III), (C)-(II), (D)-(I)
These terms come from the theory of aggregate demand (AD) and aggregate supply (AS). AD is the total planned spending on final goods, and AS is the total output of final goods.
| List-I | List-II | Reason |
|---|---|---|
| (A) Effective demand | (IV) Aggregate demand at equilibrium level | When prices are given, output is decided by AD alone. The AD at which the economy settles is the effective demand. |
| (B) Say’s law of markets | (III) Supply creates its own demand | This law says that production itself creates the income needed to buy what is produced. |
| (C) Inflationary gap | (II) Aggregate demand exceeds aggregate supply at full employment | At full employment, output cannot rise any more. Extra demand then pushes up prices. |
| (D) Aggregate supply | (I) National Income | The value of all final goods produced is earned as income by those who produce them. So total output equals national income. |
Note: None of the NCERT books (2026-27, 2025-26, 2023-24 or pre-rationalised) has Say’s law or the term ‘inflationary gap’. They are explained here for the benefit of the students. The books use the term ‘excess demand’.
NCERT (2026-27): “4.2 Determination of Income in Two-sector Model …Observe also, that without the government imposing indirect taxes and subsidies, the total value of final goods and services produced in the economy, GDP, becomes identically equal to the National Income.… Supply Side of Macroeconomic Equilibrium …In the first stage of macroeconomic theory, we are taking the price level as fixed. Here, aggregate supply or the GDP is assumed to smoothly move up or down since they are unused resources of all types available. Whatever is the level of GDP, that much will be supplied and price level has no role to play.… 4.4 Some More Concepts … The equilibrium level of output may be more or less than the full employment level of output. … On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to rise in prices in the long run.… Summary … For simplicity we assume a constant final goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle.…” |